Resilience has become a board-level priority in today’s supply chain landscape. While much attention is rightly given to geopolitical disruption, climate change, and raw material shortages, one risk is still frequently overlooked: financial instability in the software supply chain. As digital operations increasingly rely on third-party platforms, supplier fragility – driven by unpredictable and unpreventable economic pressures – is becoming a critical vulnerability that must be addressed.
From logistics and inventory systems to order management and supplier portals, critical applications form the backbone of modern supply chains. Yet many of the applications powering these operations are developed and maintained by small, specialist vendors with business models that can be fragile and volatile. The threat of supplier failure, degradation of service, or sudden end-of-life decisions is growing, and it’s one that traditional risk assessments often miss. Startup failures rose by over 25% in 2024, with many enterprise SaaS providers among them. If you haven’t yet considered the threat of a supplier failure on your own operation and the disruption it may cause, you have a significant risk hiding in plain sight.
Why software vendor fragility matters
Unlike physical disruptions, which tend to be visible and simpler to quantify, financial instability can quietly accumulate in the background – and should it crystalise, present a severe but plausible risk. A missed software update, a key developer leaving, or a product line being quietly wound down can all trigger significant operational disruption. This type of risk is often difficult to detect until the effects are already being felt. There have been some very high-profile examples of this happening in recent times, the collapse of Sungard Availability Services being one such case.
The worrying thing is that economic shocks in the software supply chain cannot always be stopped or sidestepped. Even large companies are not immune to service deterioration, particularly in the age of cloud and SaaS. These platforms are typically built for availability and security. However, they aren’t always designed to ensure business continuity for their clients. Ultimately, it is the responsibility of the end user to mitigate the risk of supplier failure. It’s the end user that needs to plan ahead, build protections, and maintain resilience. Even if the supplier can’t be.
Adding further complexity is concentration risk. The frequent acquisition of smaller tech vendors by larger firms in a buoyant tech market often results in sudden changes to product focus, support levels, or platform continuity. These changes can reshape supply chain dependencies quickly, introducing risks that are difficult to anticipate. So, a complex picture begins to emerge.
A gap in resilience thinking
Unfortunately, these are not theoretical concerns. Within finance, frameworks like DORA and PRA specifically highlight supplier fragility, service degradation and concentration risk as resilience issues. Now, if these are recognised risks in an industry known for its control and scrutiny, surely they must be just as significant (not to mention damaging) in other sectors where operational downtime affects fulfilment, reputation or customer trust.
However, continuity planning and procurement practices across many industries have yet to address these realities. The level of consideration to these risks across different sectors is varied at best – likely non-existent in some others. Too often, contracts do not establish controls such as access to source code or recovery rights if a supplier ceases operations. Many services were not developed with supplier failure in mind, leaving organisations to urgently rebuild essential functions – sometimes without the instructions.
In my work with regulated firms in financial services and their critical suppliers, I’ve seen how even seemingly stable suppliers can quietly exit the market. The warning signs are often small. They could be slower updates or reduced communication. But often, by the time it’s recognised as an issue, the impact is already being felt. This risk deserves greater attention in resilience planning.
Procurement: where third party risk management begins
These risks can be mitigated with action – best taken as early as possible. In an ideal world, resilience planning should start at onboarding, assuming critical supplier failure by default. Procurement has become a key function in safeguarding continuity. It ensures contracts include appropriate risk controls and embeds ‘resilience by design’ from the outset.
One widely adopted approach is software escrow. This involves securing access to the source code, documentation and development materials for essential software through a neutral third party. Should the supplier fail, or support be withdrawn, the organisation retains the ability to maintain the software independently. This practice is well-established in regulated industries across the world – with uptake increasing too.
Another crucial step is ensuring the ability to carry out ‘stressed exits’. This means organisations must include contractual rights and practical measures that allow them to exit key supplier relationships in a structured and low-risk way.
AI’s impact on vendor resilience
Looking ahead, the growing use of AI in software products may disrupt traditional software providers. Vendors with narrow offerings could find their business models undermined and may face financial pressures as a result. This creates a different kind of risk, one based on strategic viability rather than technical failure.
Organisations should regularly assess the financial health and future plans of their suppliers. As these pressures grow, the case for building resilience into supplier relationships becomes even stronger.
Software failures can stall a supply chain just as effectively as a logistics breakdown. Businesses that aim to maintain continuity must start considering these digital risks alongside more visible ones.
It’s an uncomfortable truth, but one we must accept. Vendor failure is no longer a rare event, so preparing for it is essential.
- Digital Supply Chain
- Risk & Resilience